By Dr. James M. Dahle, WCI Founder
I have written before about how to tax-loss harvest. I've shown you screenshots for tax-loss harvesting at Vanguard and at Fidelity. I've explained why you might not want to tax-loss harvest. I've been tax-loss harvesting for a long time, and I've learned a lot of practical tips beyond the basics over the years. Today, I'm going to give you some guidance for those with substantial taxable accounts that will make things much more hassle-free.
#1 Have a Purpose for the Losses
When you first start a taxable account and then hit your first bear market, you get all excited about tax-loss harvesting. The primary goal there is to get up to that $3,000 amount of losses that you can use as a deduction against your ordinary income. However, once you've been tax-loss harvesting for a while and have a six- or seven-figure taxable account, getting $3,000 in losses is no longer really the goal. By this point, you already have tens of thousands or hundreds of thousands of dollars in losses you've been collecting over the years.
Imagine you have a $2 million taxable account, and the market drops 20%. You tax-loss harvest as much as you can. You might now have $100,000, $200,000, or perhaps even $300,000 in losses. That's 33-100 years' worth of $3,000 losses—more than you'll probably ever use up just taking that $3,000 per year deduction. If you're going to bother continuing to tax-loss harvest, there had better be a good reason to do so. Here are some potential reasons:
- You have a small business, practice, or center (surgical, radiological, dialysis, etc.) that you will sell at some point for a big gain
- You have a house you may sell during your lifetime that has a gain that will be much higher than the $250,000-$500,000 capital gains exclusion
- You have real estate investments that will be sold prior to death
- You are likely to sell a fair amount of your taxable account to pay for retirement spending (if you sell only high basis shares with a little bit in losses, that provides A LOT of tax-free retirement spending since most of what is sold will be basis)
Most people with large taxable accounts will have one or more of these situations apply to them. At least two of them and possibly all four of them apply to us. So, we continue to tax-loss harvest.
#2 Have a Simple Portfolio in the First Place
I sometimes have people write in and ask me how to tax-loss harvest their Amazon shares or something similar. The problem is that there is no other investment out there with a 0.99+ correlation with Amazon shares. So, you're stuck picking something else (QQQ? S&P 500? Another retailer stock? A tech stock?) or waiting 30 days to buy it back to prevent a wash sale—and running the risk that you're selling low and then buying high. If you just stick to a handful of boring index funds, this works much better.
There are a dozen or more awesome tax-loss harvesting partners for a total stock market index fund. Simplicity has lots of benefits. It is also much simpler to manage a taxable account if there are just a few investments in it. The majority of our portfolio is now in a taxable account, so most of our asset classes are now in taxable. But what's in there? Just this:
- US Stocks via a Total Stock Market Fund
- International Stocks via a Total International Stock Market Fund
- Small Value Stocks via a Small Value Stock Index Fund
- Small International Stocks via a Small International Stock Index Fund
- Municipal Bonds via an Intermediate-Term Municipal Bond Fund
That's it. Super simple. Yes, we have some real estate investments and some I Bonds and individual TIPS at Treasury Direct, but tax-loss harvesting those doesn't really work due to transaction costs and hassle.
#3 Use Specific Share ID
Whenever you buy a new investment in the taxable account, be sure to set it to use “specific identification” as your cost basis tracking method. This is done at Vanguard by going to the “My Accounts” tab and then the “Cost Basis” page, which is labeled “Cost Basis Summary” at the top. Select your taxable account from the drop-down menu. Near the upper right is a link called “View/Change Cost Basis Method.” Click that.
Once you click that link, you'll see a page like this that shows all of your holdings and the method each is using for keeping track of your cost basis.
There are four choices in the drop-down menu:
- Average Cost (AvgCost)
- First In, First Out (FIFO)
- Highest In, First Out (HIFO)
- Specific Identification (SpecID)
I have no idea why anyone would ever want to use anything other than SpecID, and I don't understand why that is not just set as a default option. As you can see, when I went in to take this screenshot, there was one holding that had not yet been set to SpecID, so I fixed that while I was in there. I checked all of the accounts and found some holdings in my kids' UTMA accounts where a method had not been chosen yet and fixed those too. If you haven't looked at this in a while, you probably should.
By using Specific Identification, you can sell only the tax lots with losses, which is precisely what you want to do. Maximize your control over your tax situation by always doing this.
#4 Don't Bother for Small Amounts
When you're just trying to get your $3,000 in losses, you may be willing to tax-loss harvest for a loss of just a few hundred dollars. When you already have six figures in tax losses, you don't need to do that anymore. Don't worry, there will probably be a market correction or bear market along soon, and you can get just as much in losses all at once as you could have by doing small amounts all along the way. At this point, I NEVER tax-loss harvest for less than a high five- or six-figure loss. Maybe I miss out on a few losses here and there that I could have gotten if I had checked my account every single day, but at a certain point, I have more important stuff to do in my life. The amount of a loss worth going after for you might be larger or smaller than mine, but over time, that amount is likely to increase.
#5 Tax-Loss Harvest No More Frequently Than Once Every 2-3 Months
Despite robo-advisors out there trying to convince you of the value of daily tax-loss harvesting (so you will pay them advisory fees to do it for you), I think there are four very good reasons to only do it once a quarter or so.
The first is the simple hassle factor. You have better things to do.
The second is to ensure your qualified dividends stay qualified. If you don't own shares for at least 60 days in the period around (counting both before and after) the ex-dividend date, dividends that would have otherwise been eligible for the lower qualified dividend tax rate become ordinary dividends—and they are subject to your ordinary income tax rates. In my case, that means going from a 20% to a 37% federal tax rate. Doing that completely eliminates the benefit of tax-loss harvesting. If you never tax-loss harvest more frequently than every 60 days, that will never happen to you.
The third is to avoid the 30-day wash sale rule. Again, if you do not buy or sell more frequently than every 60 days, you'll never have a wash sale. Avoid reinvesting dividends automatically in your taxable account and watch that IRA/Roth IRA to make sure you don't have the same holding there as your taxable account. I know putting everything on auto-pilot sure is convenient, but tax-loss harvesting and automatic investing don't play together well. If you're buying all of your funds every two weeks when you get paid, you're going to have some wash sales. It's not the end of the world, but I think you're better off just pooling all of your money from all of your sources of income and investing it all together manually once a month or once a quarter. That also allows you to rebalance as you go along with new money just by directing investments at lagging asset classes.
The fourth is so you don't ever have more than two investment holdings per asset class. If you're trying to tax-loss harvest every week, you might need three or four partners for each asset class. That introduces a lot of complexity to the portfolio.
#6 Have Only 2 Options
As mentioned above, just have two good options for each asset class you own. Make sure they are investments you are willing to hold for the rest of your life, because you might just have to do so (unless you're willing to pay capital gains taxes to change or you donate a lot to charity.) Here are some of the specific investments I use, along with tax-loss harvesting partners that I would be willing to hold long-term and that are available to purchase at Vanguard. The ones marked in red are the ones I have actually owned recently.
As you can see, finding ETF partners at Vanguard is easier than finding fund partners most, but not all, of the time. For small value and small international, I very much prefer the ETFs. For muni bonds, Vanguard only has one ETF so I very much prefer the fund. For my main taxable holdings, TSM and TISM, both ETFs and traditional mutual funds work just fine.
#7 Donate Appreciated Shares Held for at Least a Year
Do you have charitable inclinations? Then, I suggest donating appreciated shares from your taxable account via a Donor Advised Fund (DAF) instead of donating cash to your favorite charities. The DAF allows for convenience and anonymity, and you can keep the fees very low by not leaving money in there long-term. The overall effect is to flush capital gains out of your portfolio; continually raising the cost basis of the portfolio; and ensuring a larger percentage of it is likely to have a taxable loss, allowing for more tax-loss harvesting. This is a really great strategy to harvest the losers and donate the winners. I've never actually realized a gain in the index funds in my taxable account. Just losses. Yet the basis in that account is over 90% of its value. Why? Because I keep raising it by donating the most appreciated shares. Be sure to hold on to those appreciated shares for at least one year before donating them or you won't get the full charitable donation deduction. If you don't you'll only be able to deduct the cost basis, not the full value.
#8 Use 2-3 Tabs in Your Browser
It's important to keep everything straight as you go through this process, especially when using ETFs. I find it best to have three tabs open, all at Vanguard.com. The first one is the Cost Basis page. This allows me to see exactly which holdings and which shares I want to sell. The second one is the Order Status page. This tells me when the sell order goes through so I can then put in the corresponding buy order. The third one is where I actually put in the orders.
#9 Move Quickly When Using ETFs
When tax-loss harvesting large amounts, you really don't want the market to move in between selling one security and buying the partner security. You want to move quickly. Yes, the price could drop in between the transactions and you could have a nice little bonus, but Murphy's Law being what it is, the market always seems to move against me while I am out of it for a minute or two putting in the buy order. Having multiple tabs open helps with this. Using market orders also helps with this.
I have found Vanguard ETF market order transactions to be essentially instantaneous, and I get fair pricing despite using a market order. With limit orders, I often found myself chasing my tail and putting in continually higher buy orders every couple of minutes as the market climbed away from me. It's much easier to avoid buying high and selling low by using market orders in this case. As soon as you see the sell order has gone through, put in a buy order.
If you are doing a very large transaction (six to seven figures), I find it helps if you do one (or perhaps both) of two things. The first is to keep a few thousand dollars of cash in your settlement fund. That way if the share price goes up a few cents right as you buy, you've still got the money to cover the transaction. The second is to actually put in two buy transactions. The first is a very large transaction for most but not all of the shares. That way if the price rises just as you put in the order, you still have the cash to cover it. Then, you do a “clean-up” buy for the remaining shares. Let me show you how this works.
Let's say you are selling VTI and buying ITOT. You sell $1.5 million of VTI. You see that ITOT is selling for $86.76 a share. And $1.5 million divided by $86.76 is 17,289 shares. So, maybe you put in a transaction for 17,200 shares and wait until that goes through. Let's say the market rose on you and you ended up paying $86.80 per share. Instead of buying 17,200 x $86.76 = $1,492,272 worth of ITOT, you actually bought 17,200 x 86.80 = $1,492,960 of ITOT, or $688 dollars more, with that first transaction. Now you only have $7,040 left to buy instead of $7,728. So, you put in an order to buy 81 shares instead of the 89 you would have bought. If you had instead bought all 17,289 shares at once, you would have bought an extra $685 that maybe you didn't have. You can solve this problem either by having some extra cash in the settlement fund or by doing two transactions, one large and one small.
#10 When Using Funds, Put Your Transaction in Near the End of the Day
Tax-loss harvesting traditional mutual funds is way simpler than tax-loss harvesting ETF shares. It all takes place at the Net Asset Value (NAV) at the end of the day. You simply put in an exchange order and voila! It just happens. Very convenient. However, sometimes markets really change during the day. You might have thought you were going to have a loss at 10 in the morning, but by 4pm, it was actually a gain! I recommend you don't put that order in until closer to 4pm ET to make sure you actually still have a loss. To check, just google the corresponding ETF share class ticker and see where it sits on the day. If you had a loss on the fund as of the prior day and the ETF share is down again (or not up much), then you are probably still going to have a significant loss at the end of the day.
You don't have to tax-loss harvest. But if you choose to do so, save yourself some trouble by following these rules, at least once you have a six- or seven-figure taxable portfolio.
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What do you think? Do you tax-loss harvest? Why or why not? How do you do it to keep it simple? Any other tips? Comment below!
Thanks for the great article! How do you justify VTI and ITOT as not substantially similar given they are both total stock market funds. I know they track slightly different indices. Curious your thoughts.
Also, curious your thoughts on if the flood of IRS funding will cause a limelight to be put on tax loss harvesting or if you think the IRS will continue to mostly not care.
No, I don’t think that’s where the IRS is going to spend their time.
They follow different indexes and hold different stocks. Frankly, if it has a different CUSIP, the IRS doesn’t care. I have yet to hear about anybody ever getting a TLH audited so I don’t spend much time worrying about it.
Just so I am clear: You can tax loss harvest up to $3,000 of losses that you can use as a deduction against your ORDINARY income.
But can use as much as you want for capital gains? For example, if I have a capital gain of $300,000 one year and have accumulated $500,000 in tax losses, I can wipe out that whole $300,000 gain in one year?
Does it matter if its short term vs long term gains or losses?
Does dividends and gains from real estate crowdfunding platforms count towards this? Meaning, I can wipe out gains from those with losses I have accumulated with index funds?
Thank you!
Yes.
No.
Capital losses offset only capital gains, not dividend income or rental income from real estate. So your capital losses from your index funds can offset the capital gains from crowdfunded real estate, but that’s it.
So how do you track this? You just keep a document of your losses each year and then when a big gain comes you just tell your accountant to use those losses to offset the large gain even if 10 years later?
It all gets carried forward on Schedule D each year. As long as your accountant has last year’s return, it’s all there.
Assume I want to do #7 and donate share to charity. I can only donate a full lot, right? On the other hand, with tax loss harvesting we try to consolidate small lots into larger lots, no?
e.g. assume I have $100k worth of lots that I want to harvest.
But I know in the future I want to donate in increments of $20k.
Does that mean I should not buy a single $100k lot, but multiple $20k lots?
Johannes,
I can’t speak to all platforms, but at least at Vanguard I have been able to donate any amount of shares From a particular lot into my Vanguard Charitable donor advised fund. So I don’t think you have to worry about your question, at least at Vanguard. I suspect it is similar at other places.
No, you can donate partial lots.
Sure, simplifying is usually good, but I wouldn’t pay a lot of extra taxes just to be a little simpler.
No, you can buy that $100K lot and donate it a little at a time.
Hi Jim,
My portfolio, taxable, is around 1M. I have about 200k in losses this year, all on stocks that I’ve held for over a year. My portfolio is 60% index funds, and the rest in individual stocks. I’ve lost most of my money on Shopify, alibaba, and Nio. I want to sell them, at a loss, and buy index funds or maybe even buy google or Facebook. Can I do this by simply selling them at a loss and repurchasing whatever else I want at the same time? Do I have to wait 30 days? I use fidelity – how would I report the let’s say $200k in ‘losses’. Thank you
Not an expert but I can answer 2 of your questions.
“I want to sell them, at a loss, and buy index funds or maybe even buy google or Facebook. Can I do this by simply selling them at a loss and repurchasing whatever else I want at the same time?” Yes and you don’t have to wait. There is no risk of a “wash sale”. However, it is also not tax loss harvesting. You are just selling at a loss and buying something different.
Yes.
No.
They get reported on Schedule D. You can just upload the 1099 from Fidelity into your tax software.
Hi, I pulled up your “How to Tax Loss Harvest at Vanguard” article and I can’t seem to get to the table that has the gains/losses in green/red, and the options to buy/sell/exchange. Has Vanguard changed the appearance, or am I doing something wrong?
Also, how does one look up potential tax harvesting partners? For example, I’m looking for a partner for VGT, Vanguard’s Information Tech ETF.
The Vanguard website recently changed, just to spite me. That info is still there somewhere though, it just might be in a different format.
Just look for another tech fund, like QQQ. Might want to look at FTEC or IYQ. I’d probably lean toward the latter. ER is 0.39%.
Sorry, what is IYQ?
Also, where do you look up the correlation between funds?
I know of a resource that provides it for Vanguard funds, but otherwise I suppose you’d have to calculate it yourself. But it’s not hard to find something with very high correlation with something else. You can double check your gestalt by looking at long term returns.
Sorry, I mean IYW, the iShares Tech ETF. Link here:
https://www.ishares.com/us/products/239522/ishares-us-technology-etf
Remember wash sales are not illegal. The disallowed loss is in the cost basis of the purchased asset that generated the wash sale.
With mutual funds, most of the dividend payouts seem to occur in December. I usually stop trading after October 15 to keep the majority of dividends qualified. Prior to that dividends payouts and the 60 day rule seem somewhat trivial.
The most interesting part of tax loss harvesting is the optionality. in 2021, I got smacked by a large cap gain distribution in VWIGX. Didn’t know about it until mid-December.
Marginal tax rates if you wander out of the 12% bracket and take cap gains can be very high.
https://www.kitces.com/blog/long-term-capital-gains-bump-zone-higher-marginal-tax-rate-phase-in-0-rate/
Does anyone have a VEXAX equivalent at Vanguard for TLH?
How about VIMAX? Very high correlation.
Could I sell, say, $20K of FSKAX (which tracks the Dow Jones U.S. Total Stock Market Index) to tax loss harvest, and then turn right around and buy FZROX (which tracks the proprietary Fidelity U.S. Total Investable Market Index) and not trigger a wash sale?
Yes, should work b/c track different indices. I myself did this 2 years ago for those same exact funds. Just be careful in fidelity as they do have a frequent trading rule where they don’t want you to move in and out of their funds to often, I believe 4 times within a month, or else they will suspend your ability to buy and sell their funds.
Yes.
Typically, just your recent contributions/lots are going to eligible for tax loss harvesting, right?? I mean, the lots that have been in the market for a while will typically rise in value… and after a certain amount of time will probably never drop below their initial values. Right?
Yes, typically.
Always my favorite WCI topic. It’s interesting how you’ve added to it or changed slightly over the years. You used to recommend 3 (or even 4) partners to harvest and now 2. I guess it’s that you have enough losses now you just don’t do it as often. I still have the groups of three you recommended in previous articles. In a crash I think it’s worth not following the 60 day rule. For example at the beginning of the pandemic I harvested 5 figure amounts and two days later harvested to my 3rd choice. I don’t want to mess with other brokers outside vanguard so I keep it to 3. You can still keep 60 days from then and be ok. But without doing that, waiting 60 days I’d miss out on another 5 figure amount which was still worth it to me.
Anyway great article. Huge believer in this. Works great with charitable giving and keeping a very high overall basis. The 60 day dividend issue is the hardest part of this. You’re rule makes it simple and I like that as a rule of thumb. I keep a calendar on my phone of when I’m allowed to do it without losing the qualified status for each fund.
Jim great article as always. i have my taxable at Fidelity and seems you can just buy/sell in dollar amounts, not shares so can avoid having to buy and sell in share amounts. Makes TLHing much easier and can avoid having to have multiple tabs open, having some spare cash in your taxable to cover any increase in share price, etc.
Seems a plus if anybody is thinking of TLHing to choose Fidelity. also, fidelity does not have ETF versions of their funds, so if you are at Vanguard I believe their is a fee to go into a Fidelity mutual fund. If you are at Fidelity, you can just get into Vanguard ETF’s and avoid the $75 fee to get into a Vanguard mutual fund.
That is a nice feature that I appreciate in my 401(k) at Fidelity. Maybe one day I’ll move my taxable account there. Hopefully Vanguard will just add the feature.
I recently TLH my intermediate munis from VWIUX to VTEAX. I was planning on switching back into VWIUX after60 days ors so, but upon reading up on this fund, it is my understanding that for interest accrued in VTEAX to be tax exempt, it has to be held for 6 months. Just wanted to make others aware.
Hi Dr. Dahle,
I wanted to clarify something you said in the article. If I own say FZROX (fidelity zero cost total stock market) in my taxable account and want to TLH it to another stock, can I do this even if I own FZROX in my Roth IRA as well, assuming I have not purchased more FZROX in my roth IRA in the 30 days prior and do not plan to in the following 30 days? Thank you!
Yes
Thanks for spending a bit of extra time teaching this. I have already harvested about $50,000 in losses. That’s enough to offset $3000 of ordinary income for over a decade. My hesitation for harvesting any more big ETF losses is the bid/ask spread. I use only large index ETF, so transaction cost are as low as possible. But even so, a median 0.02% spread each way on a million dollars worth of shares is 1M x 0.02% x2 = $400. It’s hard for me to lock in a $400 loss on the spread for the unknown possibility of a future tax deduction. Perhaps I’m misreading this? At what point do you fear you’re just paying the spread on trades with marginal benefit?
Depends on the size of the future tax deduction. I made some big transactions last week, but I probably booked $100K+ worth of losses doing it. Is that worth a few hundred bucks in bid ask spreads? I think it probably is. If you’re really worried about those though, just use funds instead of ETFs.
I guess if I thought I would have future use for more losses that I would keep doing it periodically. But as you get wealthier, you’ll likely do it less and less frequently.
I have ~$5k of tax losses harvested and accounted for on my 2022 tax return. I overcontributed to federal taxes throughout the year and will receive a refund of ~$4k from the federal government; that is using the max of $3k in capital losses for the year (obviously $2k will be carried over to next year). I’d like to get a smaller federal refund. Is it possible to “turn down” my 2022 capital loss for this tax year to say $1k (of the max $3K/yr) and carry over the remaining $4k capital loss balance to 2023?
No.
is there any issues or things I should be aware of with tax loss harvesting from VTSAX to ITOT since one is an ETF and the other isn’t?
It’s kind of a pain to go fund to ETF or ETF to fund. So if you come back to Vanguard (or make additional purchases), maybe use VTI and just stick with ETFs going forward.
So if tax loss harvesting better to go with VFIAX or VLCAX for simplicity sake if I am currently in vtsax? I am curious on what makes it so difficult to go from vtsax to ets like voo or itot within vanguard?
Yes, if you want to stick with traditional funds at Vanguard my first choice for a partner for TSM is Large Cap Index with 500 Index as a second choice.
You sell a fund at 4 pm but can’t buy the ETF until the next morning, so the market could rise overnight and you end up selling low and buying high. But I can sell and ETF at 3:32 and buy another at 3:33. Or I can exchange funds at 4 pm.